K. Vinod Chandran, J.
The assessee is the appellant herein and raises the following questions of law:-
(i) In the facts and circumstances of the case, ought not the Tribunal have held that the revaluation of certain old inventories which were obsolete and non moving items of spares was in accordance with law?
(ii) Whether in the facts and circumstances of the case the assessee was entitled for deduction of the written off value of the obsolete spares and stores?
2. The undisputed facts are that the assessee, a public sector undertaking, had been valuing its assets in the balance sheet. On a verification of the accounts by the Comptroller and Auditor General (C&AG), it was found that the assessee had been valuing assets which had become obsolete. There was also an audit objection raised insofar as the valuation as revealed from the balance sheet of the assessee. Based on this, the assessee had appointed an expert committee to value the obsolete items of stores and spares maintained by the assessee. The expert committee found 313 items of stores valued at Rs. 374.23 lakhs as not having been used for the past five years or more, and 14 items valued at Rs. 24.94 lakhs were identified as totally obsolete and not possible of any further use. The findings of the committee also were duly supported by technical evaluation which resulted in a recommendation to devalue 313 items by 50% and the 14 items at 100%. Hence, a total of Rs. 2.12 crores (187.12+24.94) was debited to the profit and loss account as loss on revaluation of inventory under the head repairs and maintenance.
3. The annual report also indicated the Board of Directors having directed the management to constitute a committee to review the non moving stores and spares and to carry out necessary adjustments in the accounts in accordance with the audit objections raised by the C&AG. The Assessing Officer, however, found that the assessee had been showing spares at cost in the balance sheet and then writing it off in the year of use. It was hence found that the assessee had in the present year changed its accounting practices and hence declined the claim of write off of certain spares by 100% and others by 50%. It was also found that the items which were devalued were not trading items and that it cannot be termed as a stock in trade. The decision relied on by the assessee in (1964) 51 ITR 329 [Forest Industries Travancore Ltd. v. Commissioner of Income Tax, Kerala] was distinguished insofar as the decision having proceeded on the premise of a concession by the Department as to the spares being stock in trade. The decision of the Apex Court in (1991) 188 ITR 44 (SC) [Commissioner of Income Tax v. British Paints India Ltd.] was found to be of no help to the assessee insofar as the decision having found the income tax officer to be justified in rejecting the books of accounts if the ordinary principles of commercial accounting are not followed.
4. In the present case, the AO found the following reasons to decline the claim.
(1) The assessee altered the method of accounting inventory in the previous year.
(2) This resulted in the incorrect statement of the profit/loss of the business in the year.
(3) The expenditure claimed is a notional/fictional claim.
(4) The case laws relied on by the assessee are not applicable.
5. The first appellate authority, however, found favour with the assessee's contentions. It was found that the claim on account of obsolescence of spares and consumables was based on the observations and suggestions made by the C&AG. The normal accounting procedure followed by the appellant was found to be taking it as stock in the balance sheet on its purchase and debiting the same to the profit and loss account to the extent it is actually used or consumed. Depending on the manner in which the stores and spares are rendered useless, the assessee also claims it as a deduction; as loss in the year in which it is so revalued. The first appellate authority also found that in the earlier years, i.e. assessment years 1993-94, 1995-96 and 1999- 2000, the assessee had claimed 100% revaluation on such spares which were found to be totally unusable and having only scrap value. The first appellate authority in those years had allowed 80% of the appellant's claim finding 20% to be the scrap value of those items. The Department had not filed an appeal from the said order. On a similar reasoning, the first appellate authority found that the claim can be allowed for the present year also.
6. The Tribunal reversed the order of the first appellate authority. The Tribunal agreed with the observations of the CIT (Appeal) in the earlier years, insofar as 20% alone having been declined as scrap value for obsolete spares revalued in those years. Adopting the very same reasoning, the assessee was permitted 80% of the claim with respect to 100% devaluation claimed items, again, apportioning 20% as the scrap value of such items. However, with respect to the items in which 50% devaluation was claimed, the Tribunal found that the committee had not spoken of the utility value or about the physical condition and the 50% devaluation was recommended by the committee without doing any realistic appraisal of each of the items included in the list of 313 items.
7. Before we look at the questions itself, we have to look at the decisions as placed before us. In Forest Industries Travancore Ltd., true the court proceeded on the basis that the stores and spares represent the stock in trade of the assessee. Therein, the Division Bench of this Court relied on the decision of the High Court of Madras in (1962) 44 ITR 22 [Indo Commercial Bank Ltd. v. Commissioner of Income Tax] and it was held that the change in the method of valuation though detrimental to the Revenue, it was not a relevant factor in deciding whether the assessee had right to change the basis of valuation. In the present case also the assessee had been consistently writing off the stores and spares when it actually become obsolete after having put it to use. The stores and spares which were directed to be devalued were never used in the business and hence despite the same having been shown as stock in the profit and loss account, there was never any loss claimed; for it being not used in the business of the Company. Revaluation was necessitated also not by the assessee on its own volition but on an audit objection raised by the C&AG. In such circumstances, we have to find that there is no change in accounting principles.
8. When the stores and spares were put to use, their written off value was debited to the profit & loss account. However, here the stores and spares were never used and hence a valuation was attempted as per accounting principles itself to revalue the obsolete stores and spares. This works out to the prejudice of the revenue, but that sole reason cannot result in it being disallowed. The valuation was an accepted practise and it was necessitated as the situation warranted a revaluation of obsolete stores and spares. The method of revaluation cannot be faulted for reason of it having been accepted by accounting principle AS-2. The assessee had also carried out a similar exercise of devaluation in the earlier years, which were allowed to the extent of 80%, the 20% being disallowed as scrap value.
9. The decisions of two other High Courts were also relied on by the assessee. (2015) 375 ITR 276 (Bombay) [Commissioner of Income Tax-1, Mumbai v. Indian Rare Earths Ltd.], considered the issue of non-moving stores and spares which corroded over a period of time due to wear and tear; written off in the subject year. The High Court of Bombay found that the objection raised on the method of accounting being changed, is not justifiable even under section 145A of the Income Tax Act. Therein, the accounting standards were altered in the earlier assessment year, i.e. 2001- 02. Here too the assessee had for the earlier years devalued certain items @100% which was permitted to the extent of 80%. In the current year there were certain items devalued to the extent of 50%, which cannot be said to be a change in the accounting practice. The accounting standards which applied to the earlier years were with respect to devaluation of stores and spares which were actually used in the business of the Company. We also notice the judgment of the High Court of Karnataka in (2015) 230 Taxman 544 (Karnataka) [Commissioner of Income-tax, Bangalore v. IBM India Ltd.], wherein also a similar devaluation of obsolete stock and spares were permitted following Accounting Standard -2 issued by the Institute of Chartered Accountants of India.
10. In the present case, the Tribunal had permitted devaluation with respect to the items in which the committee had recommended 100% devaluation confining the actual devaluation to 80%. The Tribunal disallowed 20% of the claim finding it to be the scrap value of the devalued items. With respect to the other items, the committee had recommended only 50% devaluation. We have to notice that the committee was appointed by the Board of Directors and consisted of Senior Executives of the Company itself. It is also seen from the annual report that a technical evaluation was conducted and it was thus th
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at 313 items were found to be devalued to 50% of their value. The Tribunal's findings that the committee's recommendations were without any basis cannot hence be accepted. The Committee of officers based on the technical evaluation had recommended devaluation at 50% finding the 313 items of stocks and spares to be of some use in the business of the Company or possible of earning 50% of the cost price in the market being second hand stores and spares. When the devaluation of 100% obsolete items were allowed to the extent of 80%, we do not find any plausible reason for declining the devaluation to an extent of 50% claimed on the basis of a technical evaluation and recommendation made by a committee of officers appointed by the Board. In such circumstances, we reverse the order of the Tribunal and allow the claim made of 50% devaluation with respect to the 313 items. The questions of law are answered in favour of the assessee and against the Revenue. 11. The Income Tax Appeal is allowed as above. No order as to costs.